Setting aside the complexity, the simplest thing investors can do to gain valuable insight is to look at patterns. To explore what might be next for stocks, let’s look at a chart.

Chart

Please click here to see an annotated chart of S&P 500 futures
US:ESH8
Similar conclusions can be drawn from popular ETFs such as S&P 500 ETF
SPY, -0.11%
Nasdaq 100 ETF
QQQ, +0.63%
and small-cap ETF
IWM, -0.12%
It is more instructive to use a futures chart because futures trade overnight and there is a very important point on the chart that is visible only on the futures chart.

Please note the following from the chart:

• In recent history, most of the very shallow dips formed a V pattern. In a V pattern, the dip is bought and the market recovers.

When the market dipped this time, many were expecting a V bottom. The chart shows that a V bottom did not occur. This was addressed in the early stages of the stock market dip, when many gurus were predicting a V bottom. From the Morning Capsule made available to subscribers of The Arora Report: “If the stock market continues to go up from here, it would have formed a V bottom yesterday. Historically, V bottoms are less common than the retest. If a retest were to occur, the market would fall back to yesterday’s lows. The momo [momentum] crowd likely has stops under yesterday’s lows. A typical scenario would be hunt-and-destroy algorithms to become active, take out stops of the momo crowd and then for the market to rebound. If a retest occurs and it fails, then the probability of something more than a garden-variety correction will rise.”

This observation has now proven spot on. A V bottom did not occur this time.

• The chart shows that a retest of the prior low marked with a horizontal white line is in progress.

• The chart shows two scenarios from here on that will result in a bullish W pattern. These are shown with green dotted lines on the chart.

• The chart also shows two scenarios if the retest fails. This will be a bearish break. These scenarios are shown with dotted red lines on the chart.

It is high time to remind investors of Arora’s Second Law Of Investing: “No one knows with certainty what is going to happen next.” The best way to handle uncertainty is to think in terms of probabilities.

The probability of a bullish W pattern forming is significantly higher than a bearish break.

Timing model

In addition to the simple chart, those interested in a comprehensive approach may look at The Arora Report timing model with inputs in 10 categories. The model is adaptive, i.e., it changes automatically with market conditions. To see the 10 inputs, please click here.

What to do now

Many investors are overly concentrated in technology. Some investors mistakenly think that just because they own several ETFs and mutual funds, they are diversified. Take a look at the holdings of your ETFs and mutual funds. You will find over-concentration in Apple
AAPL, +1.30%
Microsoft
MSFT, +1.05%
Facebook
FB, +2.48%
Amazon
AMZN, +2.01%
and Google
GOOG, +1.20%GOOGL, +1.73%
If there is a bearish break, those stocks have the highest risk. If you are overly concentrated, consider trimming the positions on bounces in the market.

To be helpful, the following articles are provided to you for the information, understanding and action items for current market conditions.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

Nigam
Arora

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.